With the cost of living crisis taking hold and energy/fuel bills increasing significantly, many individuals have been forced to make cut-backs where possible. One such area appears to be pension savings, to help provide more disposable income on a monthly basis. Whilst this may be temporary, and reductions minor, we need to consider the longer-term impact.
In a recent study, one in twenty UK adults confirmed that they had stopped their monthly workplace pension contributions in response to rising cost pressures. A further 6% of the 2,000 respondents to the survey by pension provider, Canada Life, said they were considering pausing pension savings now, with a further 9% considering doing so in future.
Canada Life’s modelling found that a 40-year-old earning £50,000 per year, who paused pension contributions of 8% for one year would have around £15,000 less in their pension by retirement at age 67. In giving up this potential £15,000, they would have only saved contributions of £4,000 gross over the year (£2,720 net, assuming an income tax and National Insurance saving on the contributions).
A further consideration is that with most workplace pension schemes, contributions are matched to a certain level by the employer. Therefore, a reduction in employee pension contributions may also mean a reduction in employer contributions, compounding the long-term implications.
However, it is important to remember that these are unprecedented times, with the energy price cap increasing almost 80% in September 2022. A temporary reduction in pension contributions may therefore be necessary for some people to help meet monthly outgoings.
What individuals should keep an eye on is that longer-term retirement savings aren’t forgotten about following any reduction in contributions. Doing so could lead to an increasing number of individuals being unable to meet their retirement goals, potentially having to work longer than planned, or forgoing their intended lifestyle in retirement.
This is where effective financial planning is key, taking into account short-term needs and balancing these with longer-term goals and objectives.